Looking to Corporate America to Change From Within

Business: Though new laws will help to restore confidence, financial markets are demanding tougher steps to curb abuses, experts say.

Business reforms being readied by Congress will help ease the crisis of confidence enveloping corporate America, but the financial markets will play as big a role in curbing future scandals, observers said Wednesday.

House and Senate negotiators agreed Wednesday on legislation that would increase oversight of the accounting industry and impose stiffer penalties for corporate fraud, clearing the way for Congress to send the bill to President Bush this week for his expected approval. The bill also includes myriad other new rules, such as a requirement that top executives certify their companies' financial results.

Several observers said better enforcement of existing laws, rather than passing new laws or adding stiffer penalties, would be the best deterrent against civil and criminal wrongdoing by corporate executives. The bill's proposal to boost regulators' budgets also would help, they said.

But "the market itself will ultimately reform things," said Charles Elson, head of the Center for Corporate Governance at the University of Delaware. For example, he pointed out that stock exchanges and institutional investors had called for independent board directors before that became part of Congress' bill, and said "the market is way ahead" in demanding change.

"The keys are independent boards, independent auditors and criminal prosecution of those who intentionally violate the law," Elson said. "That's how this stuff goes away."

Some specialists in corporate ethics were especially skeptical of Congress' decision to boost penalties for corporate fraud, saying such increases do little to curb white-collar crime.

"They don't have an impact on much of anything but plea bargains," said Nell Minow, editor of the Corporate Library, a Web site devoted to corporate governance issues.

Minow said new rules proposed by the New York Stock Exchange, and expected to be voted on next month, go further to curb abuses. Those rules include increasing the independence of corporate boards, and in particular audit committees. Congress' bill is "a promising first step," she said, "but the impact of this legislation will be limited."

Even so, observers generally agreed that Congress' reforms would be one more deterrent to any executive who thinks about cooking the books.

The bill was endorsed by the Business Roundtable, an organization of the nation's chief executives, because it "will help restore investor trust and put the financial markets on the road to recovery," the group's chairman, John Dillon, said in a statement.

Ted White, director of corporate governance at the California Public Employees' Retirement System, known as CalPERS, said the massive pension fund supports reform.

"I personally was very frustrated that until WorldCom it seemed like we were banging our heads against the wall," he said. "But it seems in the last few weeks they've been falling all over themselves trying to get the reforms through."

Congress' crackdown "if nothing else also certainly gets the attention of board members and officers of public companies," said Joe Goodwin, chief executive of Goodwin Group, an executive search firm in Atlanta.

He said it was no coincidence that the Dow Jones industrial average soared nearly 500 points on the day Congress came close to passing its bill and authorities arrested several executives of Adelphia Communications Corp.

"Today sent a very clear signal that the laws are going to be enforced," he said.

But some say Congress' overhaul still would not have been enough to stop the accounting irregularities at Enron Corp. and other scandal-ridden firms.

"What could have prevented Enron was an independent board," Elson said. "Active fraud is very hard to detect, and the way you detect fraud is to punish people who engage in fraud. We've long had the ability to do that."

Even so, one of Congress' new proposals--a plan to create an independent board that would oversee the corporate accounting field and discipline wayward auditors--drew applause for helping to shore up investors' damaged trust.

CalPERS views the issue of auditor independence as a keystone of the bill, White said, but he remains convinced that funding for such a board must come from an independent source without industry ties. That issue is still unclear, he said.

"The devil is in the details, and there is no better example than this one," White said.

Even if the marketplace is the fountainhead of reform, Congress gets credit for potentially lessening the ability of executives to put their companies at risk through financial shenanigans, said David Bowman, head of TTG Consultants/Lincolnshire, a workplace consulting firm in Los Angeles.

Thousands of workers have lost their jobs, their retirement savings or both because of the collapses of Enron, WorldCom, Global Crossing Ltd. and other firms that used questionable accounting to mask financial woes.

"You've got people out on the street with 401(k)s that are virtually worthless," Bowman said. "People out on the street through no fault of their own."